The Road to a European Transfer Union

In the decade since the 2008 global financial crisis and the subsequent euro crisis, European policymakers have consistently relied on Northern European countries to foot the bill for the rest of the eurozone. But what will happen in the coming decades when Northern baby boomers retire and the coffers run dry?

MUNICH – Ten years after the Great Recession plumbed economic depths unseen since the Great Depression, it is necessary to step back from quotidian politics to get a glimpse of the bigger picture. Europeans need to ask themselves where they have been, and where they are headed next on their journey.

Twenty years ago, in 1998, exchange rates among many countries in the European Union became irrevocably fixed in preparation for the introduction of the euro. Suddenly, near-bankrupt Southern European countries no longer had to pay huge interest premiums of around 5-20 percentage points relative to Germany. So, awash in cheap loans, Southern Europe experienced a debt-financed economic boom that pushed wages and prices sky-high. Eventually, that boom became a bubble.

Then, a decade ago, the bubble that had simultaneously been developing in the US subprime-mortgage market burst, leading to the global financial crisis and, subsequently, the collapse of the bubble in Southern Europe. In their hour of need, crisis-ridden Southern European countries ran up huge overdrafts with the European payment system, to replace the private loans no longer available to them.

Now that the EU economy is doing well it is time to think about the future.I would expect that someone is going to ask mr. Draghy how this Euro 2300 billion is going to be repaid.What is to be done with the Euro ? It is obviously poorly designed, but can it be be repaired by bandages.Apart from the monitairy inbalance France want some more transfers. Sharing of debts, money for the peripherie, guaranties of private bankloans.The ECB is controlled by countries in need of money, not by the ones paying.In Germany the EU has their own disciple, mr. Schultz, in a position of power with the SPD.France is taking the lead in the EU. But France is also the country that forced the Euro upon us, that has caused so much trouble.Since their are no unbiased Europeans living in Europe. My suggestion is would it not be good to bring in some non-European experts to advise us how to get out of this mess.

Henk - It appears France wanted the euro because it engaged Germany and indirectly the German assets, and the current Macron initiative looks very similar. This has pretty much been the French psyche since WW2 - It was the whole basis of the ECSC which was the precursor to the EEC and the now current EU. Germany agreed to the euro because it wanted German Reunification and lower ECB rates to help with the cost otherwise it was unmanageable. ECB rates dropped, a bubble formed directly because of that and the EZ remains dysfunctional. If you want to have some insight into the French apprehension with and the relationship with Germany then reading about the French thinking behind the pre WW2 Maginot Line is interesting. Another very logical but totally flawed implementation. If you want an outside expert then I would suggest Goldman Sachs who addressed Greek books to allow their entry into the euro by moving liabilities off central account with magic dust

Please explain to us Mr Sinn, what would've happened if instead we had let the southern countries default and the northern European banks that had lent them bear the cost of that default? Would that have been more fair to the eurozone taxpayers? Would there still be a eurozone or an EU for that matter?

Overt measures such as transfers to the south will last one election cycle max, and then be voted down. The build up of worthless target 2 claims will then continue again. It will only be stopped when Germany draws a red line in the sand. Might as well do it at 1,000 billion I think.

'And she said, 'we are all just prisoners here, of our own device'And in the master's chambers,They gathered for the feastThey stab it with their steely knives,But they just can't kill the beast'Hotel California

As usual Germany is crying wolf. There may be a wolf about sometime but not anytime soon.

Herr Sinn has described on this site in a previous article that Germany has the benefit of a whooping 20+% (possibly more depending how you calculate it) discount on exports via using the euro and the euro FX being held down by the Med Club.

Very neatly Germany gets the euro currency discount, gets the big players in the EU to provide handouts to newcomers such as the V4, who then use that cash to buy from Germany assisting the German balance sheet. The export relationship between Germany and the V4 (and others) would be worth an assessment but seldom is raised

I dont blame Germany for any of this - far from that - but it is there and crying wolf wears a bit thin.

Herr Sinn is spot on with the ageing democracy but it hardly anybody elses problem if German women want to avoid having children. In due course Germans - following the Japanese extinction thesis (the date has been calculated as 3776) - will also become extinct unless something changes as the German fertility rate is not much higher than the Japanese one.

The Target ledger IOUs far from being imaginary as Herr Sinn purports are the shackles that hold the Med Club close to Germany via the euro - maintaining the status quo which for now appears to benefit Germany - so I would be very surprised if anything changed anytime soon. Germany is free to leave the EZ but probably does not want to. The Med Club are not free to leave anytime soon and in reality are debt serfs and facing depopulation via outward migration, that could potentially solve Germany's demographic but if so it will continue to expand the Med Club problems. Germany would become less German by this mechanism as some 8 million young skilled, qualified, educated and German speaking workers suitable for an industrial society are probably needed shortly.

You really honestly believe that fiscal transfers can be pushed through? I personally predict that if Fiscal transfers from north to south are pushed through that anti EU parties grow exponentially has northern Tax payers pay for southern debts. Will see whose right?

Germany has been caught in the fly-paper constructed by the High Priests of the Euro Project in Brussels and sold to them by their own Chancellor, Helmutt Kohl.

Though no fan of the Euro, Prof. Sinn seems to think that, in view of the 907€ billion of IOUs it is holding onto in the T2 Balance system,Germany has no choice but to stay the course and accept the inevitability of fiscal transfers. But realistically there is near to zero chance of redeeming these IOUs within the current fixed exchange rate mechanism, and they should therefore be written off as a sunk cost.

In which case their logical choice of action would be to step aside from the Euro and allow it to depreciate to a more sensible exchange rate against the NeuDmark, thereby allowing Italy and others to trade on a more equal footing and perhaps in time redeem some of their Euro denominated IOUs.

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